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4000 - Advisory Opinions
Inclusion of Preissued, Postdated Cashier's Checks
in FDIC Deposit Assessment
FDIC-87-58
December 4, 1987
Richard T. Miller, Attorney
This memorandum responds to a deposit assessment protest submitted
by *** of the ***. 1
*** protests an audit report exception taken to its "pension pay
service fund, account no. ***" pursuant to an FDIC assessment audit
conducted in December 1986. Furthermore, *** has asked for a refund of
what it asserts is an overassessment in the amount of $158,000.
I. BACKGROUND
This protest involves *** pension payment service. *** has a section
in its trust department called the "Benefit Payment Services"
which sends out official checks to pay pension trust account
beneficiaries. This Benefit Payment Services section make check
payments in two ways: scheduled check runs and unscheduled check runs.
Unscheduled check payments are for lump-sum payments, new pension
accounts or other changes from the usual payment schedule. *** protest
does not involve the unscheduled check runs; rather, the protest
involves the Benefit Payment Services' scheduled check runs.
The scheduled check runs are the monthly pension payments made by
the Benefit Payment Services section. *** routinely prepares, issues
and posts cashier's checks a few days in advance of their payment date.
*** does this so that the payees receive their pension payments no
later than the date the pension is due. This practice enhances ***
competitiveness, and it allows the pensioners to promptly meet their
financial obligations.
The problem with *** practice is that these preissued, postdated
cashier's checks are posted to *** general ledger as of the date of
issuance, but they are not actually funded until the payment date.
Furthermore, *** honors these checks even if they are presented before
their payment date. On the date of issuance, these pension checks are
posted to *** "current outstanding checks, account no. *** ".
This creates a credit in *** general ledger that *** offsets with a
commensurate debit balance in the pension pay service fund, account no.
***. When the payment date on these pension checks arrives, *** sweeps
money from the trust account of the ERISA customer into the customer's
deposit account. This deposit is then debited so that the money can be
posted to the current outstanding checks, account no. *** to cover the
pension checks. Finally, the debit balance in the pension pay service
fund, account no. *** is eliminated by the aforementioned "trust
sweep", and the account consequently is brought to zero as of the
payment date of the pension checks.
In the FDIC deposit assessment audit of December 1986, the FDIC took
exception to the pension pay service fund, account no. ***.
Furthermore, the FDIC included *** preissued, postdated cashier's
checks in the assessment base. In light of *** protest of this
assessment, you asked whether or not preissued, postdated cashier's
checks are assessable where they are posted to the bank's general
ledger on the release date. 2
II. THE FDIC's POSITION
The FDIC's argument essentially is that these preissued, postdated
cashier's checks are deposits, and they consequently are assessable.
Your *** memorandum states that the *** considers official checks
released by a bank for delivery to be issued and outstanding.
Furthermore, your memorandum states that issued official checks meet
the definition of "deposit". See 12 U.S.C.
§ 1823(1)(4). Therefore, you state that the *** exception
was taken because deposits posted to the institution's general ledger
are assessable.
III. *** POSITION
{{4-28-89 p.4294}}
*** takes the position that its preissued, postdated cashier's
checks are not assessable deposits. Furthermore, *** states that its
accounting practices merely provide a means for keeping track of these
pension checks. *** backs these positions by arguing that the pension
checks pose no deposit insurance risk. *** also argues that these
pension checks do not meet the definition of "deposit" until
their due date arrives. When the due date does arrive, *** argues that
its deposit base is then properly reflected in the current outstanding
checks, account no. ***. Finally, *** argues that the pension pay
service fund, account no. *** has no significance for assessment
purposes because a cash management relationship exists between this
account and the current outstanding checks, account no. ***.
IV. ISSUES
*** assessment audit exception raises two questions. First, do
preissued, postdated cashier's checks meet the definition of
"deposit"? Second, is *** pension pay service fund, account no.
*** an assessable deposit account?
V. SUMMARY CONCLUSIONS
*** preissued, postdated cashier's checks do not meet the definition
of "deposit" until their due date. Furthermore, *** pension pay
service fund, account no. *** is not a deposit account. Therefore, the
exception to *** deposit assessment is incorrect.
VI. DISCUSSION
The assessment base of a bank is "equal to the bank's liability
for deposits . . ." 12 U.S.C. § 1817(b)(4)(A). As applied to
*** protest, the first step in this analysis is to determine whether or
not preissued, postdated cashier's checks meet the definition of
"deposit". And if these drafts are deposits, the next step in
this analysis will be to determine whether or not preissued, postdated
cashier's checks are bank liabilities. Therefore, in order to be
included in the assessment base, each of these preissued, postdated
cashier's checks must be: 1) a "deposit", (2) for which *** is
liable.
Preissued, postdated cashier's checks do not meet the definition of
"deposit" until their due date. Section 3(1) of the
Federal Deposit Insurance Act ("FDI ACT") provides several
definitions of the term "deposit", but the only definition
relevant to cashier's checks is found at subsection 3(1)(4).
See 12 U.S.C. § 1813(1)(4). This provision
defines "deposit" to mean "outstanding draft . . .,
cashier's check, money order, or other officer's check issued in the
usual course of business for any purpose . . ." Id. A
preissued, postdated cashier's check is not any one of these four
instruments.
Preissued, postdated cashier's checks are not cashier's checks or
issued officer's checks until the date they become payable. Indeed,
until the due date, a preissued, postdated cashier's check is not even
a "check" as defined by the Uniform Commercial Code. See
U.C.C. § 3-104(2)(b). This is because preissued, postdated
cashier's checks are not "payable on demand''. See U.C.C.
§ 3-108. See also Allied Color Corp. v. Manufacturers Hanover
Trust, 484 F. Supp. 881-883 (S.D. N.Y. 1980) ("a postdated
check is not, prior to date, a "check' as defined in [U.C.C.]
§ 3-104(2)(b), since it is not payable on demand"'). Therefore,
until the due date, a preissued, postdated cashier's check is not a
cashier's check or issued officer's check for purposes of what is a
"deposit".
In addition, a preissued, postdated cashier's check is not an
"outstanding draft" for purposes of what is a "deposit". A
"draft" is a negotiable instrument if it is a "direction to
pay" a person who is identified with "reasonable certainty".
See U.C.C. §§ 3-102(1)(b), 3-104(2)(a). A preissued,
postdated cashier's check probably is a "draft'' (see
Allied. 494 F. Supp. at 883), but such an instrument is not an
"outstanding draft". The term "outstanding"
means that an obligation is effective but undischarged or unpaid.
See Black's Law Dictionary 994 (5th ed. 1979). Therefore, an
"outstanding draft" is an effective but unpaid obligation. In
contrast, a preissued, postdated cashier's check is not an effective
obligation until the due date. See U.C.C. § 3-114(2)
("where an instrument is . . . postdated the time when it is
payable is determined by the stated date"), Hareas v.
Kyriakopoulos, 428 N.E. 2d 500, 502 (Ill. App. 1981) under U.C.C.
§ 3-510, Official Comment 2 ("the following reasons for refusal
are not evidence of dishonor, but of justifiable refusal to pay or
accept: . . .Post dated). In addition, the payees of
***
{{4-30-91 p.4295}}
postdated cashier's checks are on notice that the instruments are not
negotiable until the due date. On the reverse of each draft, ***
printed the following statement: "This check must be personally
endorsed by the payee in ink on or after the date shown on the
face hereof in the payee's handwriting." (Emphasis supplied.)
Therefore, whereas an "outstanding draft" constitutes an
effective but unpaid obligation, a preissued, postdated cashier's check
is not an effective obligation until the due date, and *** cashier's
checks consequently are not outstanding drafts for purposes of what is
a "deposit".
Finally, a preissued, postdated cashier's check is not a "money
order". A money order does not need to be presented to its original
place of purchase in order to be honored. See Dictionary of
Banking & Financial Services 442 (2d ed. 1985). In contrast, a
cashier's check, whether preissued and postdated or not, does require
presentment to the drawee bank in order to be honored. See
U.C.C. § 3-504. Furthermore, and unlike a preissued, postdated
cashier's check, a money order is an effective obligation without
restriction on the payment date. Therefore, a preissued, postdated
cashier's check is not a "money order".
In summary, the only definition of "deposit" relevant to ***
preissued, postdated cashier's checks is found at subsection 3
(1)(4) of the FDI Act, but this definition does not apply.
Subsection 3(l)(4) of the FDI Act defines
"deposit" to mean "outstanding draft . . ., cashier's
check, money order, or other officer's check issued in the usual course
of business . . ." 12 U.S.C. § 1813(1)(4). Because
they are not payable on demand, postdated cashier's checks are not
actually checks until the due date. As a consequence, *** postdated
cashier's checks legally are not cashier's checks or other officer's
checks. Furthermore, *** postdated cashier's checks are not outstanding
drafts or money orders primarily because, unlike these latter two forms
of negotiable instruments, postdated cashier's checks do not represent
effective obligations until their due date arrives. Therefore, ***
preissued, postdated cashier's checks do not meet the only relevant
definition of "deposit" in the FDI Act, and *** pension pay
service fund account no. *** consequently is not a deposit account.
Since *** postdated cashier's checks do not meet the definition of
"'deposit", it is not necessary to determine whether or not they are
*** liabilities for purposes of what is assessable by the FDIC.
See 12 U.S.C. § 1817(b)(4)(A) (assessment base of a bank
is "equal to the bank's liability for deposits''). Regardless, and
even if *** postdated cashier's checks are construed to meet the
definition of "deposit", *** postdated cashier's checks are not
*** liabilities until the due date arrives. As argued above, preissued,
postdated cashier's checks are not effective obligations until the due
date. See U.C.C. §§ 3-104(2)(B), 3-108, 3-144(2),
Hareas v. Kyriakopoulos, supra, U.C.C. § 3-510, Official
Comment 2. Furthermore, *** practice of honoring these cashier's checks
before the due date is a business decision without legal significance
for assessment purposes. 3
Finally, since preissued, postdated cashier's checks are not
deposits until their due date, *** pension pay service fund, account no
***, is not a deposit account. The existence of this account and ***
premature posting of these pension checks confuses the assessment
process, but substance should rule over form. And as a matter of
substance, *** pension pay service fund, account no. ***, is not a
deposit account.
VII. ADDENDUM
{{4-30-91 p.4296}}
1 *** Go Back to Text
2 *** Go Back to Text
3 *** practice of honoring these postdated cashier's checks has
no legal significance for assessment purposes because it does not
accelerate the negotiability of these drafts. In other words, ***
practice of honoring these drafts before the payment date should not
affect *** right to refuse payment before the pay date. Furthermore,
*** practice does not affect the fact that these drafts pose no deposit
insurance risk to the FDIC until the payment date. If *** failed before
the payment date of these preissued, postdated cashier's checks, the
rights of the payees would be frozen as of the failure date. See
American National Bank v. FDIC, 710 F2d 1528, 1540-41 (11th Cir.
1983). Since these drafts would not yet be negotiable, the payees could
not collect payment from the FDIC. Finally, not even *** practice of
prematurely honoring these drafts would enable the payees to
prematurely collect from the FDIC. Even if a "course of dealing"
relationship were deemed to accelerate payment, such an
"agreement" would be unenforceable against the FDIC because there
is no written agreement that *** will prematurely pay on these drafts.
See 12 U.S.C. § 1823(e). Go Back to Text
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